Supreme Court shoots down a popular class action litigation tactic

Since its inception in 2005, the Class Action Fairness Act (CAFA) has allowed class action defendants to transfer cases involving more than $5 million from plaintiff-friendly state court to federal court, which traditionally offers greater protection to corporate defendants. But for years, the plaintiffs bar has creatively evaded federal jurisdiction by taking advantage of one of CAFA’s loopholes.

“After CAFA was enacted, class action plaintiffs could still stay out of federal court by filing a stipulation stating that the class wouldn’t accept aggregate damages of more than the jurisdictional amount of $5 million,” says Ogletree Deakins Shareholder Patrick Curran.

But on March 19, the Supreme Court clearly condemned this popular plaintiffs bar tactic in its decision in Standard Fire Insurance Co. v. Knowles.

Capping Damages

In Standard Fire, Greg Knowles filed a class action against his home insurance provider, Standard Fire Insurance Co., in Arkansas state court for allegedly underpaying his claims after his house sustained substantial hail damage. He sought to certify a class of “hundreds, and possibly thousands,” of similarly situated Arkansas policyholders. Knowles also included the following statement: “Plaintiff and Class stipulate they will seek to recover total aggregate damages of less than five million dollars.”

Standard Fire removed the case to federal court under CAFA, asserting that the combined claims of the proposed class members would exceed $5 million. Despite agreeing with Standard Fire that the damages and attorneys’ fees would likely exceed $5 million, a district court ruled that Knowles’ suit should go back to state court because of his stipulation that he and the class wouldn’t seek more than $5 million in damages. The 8th Circuit denied Standard Fire’s petition for appeal, so the insurer appealed to the Supreme Court.

The case was concerning for corporate stakeholders. There was a split among the circuits as to whether stipulations such as Knowles’ could exclude cases from CAFA’s scope. In an amicus brief, the U.S. Chamber of Commerce supported Standard Fire and told the high court that the case was “of exceptional importance” to the business community. The Supreme Court granted certiorari in August 2012.

Concise Curtailment

Seven months later, the high court handed down a concise, unanimous decision vacating the district court’s order to remand the case back to state court. The opinion was the high court’s first to address CAFA.

“The Supreme Court said [Knowles’] stipulation had to be ignored—and that’s the bottom line,” says John Battenfeld, a partner at Morgan Lewis.

The court reached this conclusion by applying its decision in Smith v. Bayer Corp., a 2011 ruling in which it held that a proposed class action can’t bind nonparties to the class action. The court reasoned that because Knowles had made his damages cap stipulation prior to certification, his stipulation couldn’t bind the class. “Knowles lacked the authority to concede the amount-in-controversy issue for absent class members,” Justice Stephen Breyer wrote for the court.

The court also held that CAFA doesn’t forbid a federal court from considering the possibility that a nonbinding stipulation may not survive the class certification process. “To hold otherwise would, for CAFA jurisdictional purposes, treat a nonbinding stipulation as if it were binding, exalt form over substance, and run directly counter to CAFA’s primary objective,” Breyer wrote.

Short But Sweet

The Supreme Court’s opinion is short, so it’s difficult to determine how courts will apply it. Nonetheless, Standard Fire offers some clear benefits to corporate defendants.

“In general, this is a really good decision for defendants,” Curran says. “It’s another in a series of pro-class action defendant decisions by the Supreme Court in recent years. This will result in more large class actions being brought in federal court. I would expect that there will be more original filings in federal court,” where class certification standards are more stringent.

Still, the defense bar mustn’t rule out continued sneakiness on the part of plaintiffs lawyers (see “Dedicated Deviants”).

“They’re typically a pretty creative group, and I’m sure they’re already thinking about other ways to avoid CAFA,” says Steven Reade, a partner at Arnold & Porter. “But it’s important that corporate defendants don’t give up on the possibility of a CAFA removal even if the plaintiffs have tried something to avoid it.”

Additionally, Standard Fire doesn't change the fact that defendants still have the burden of proving that a proposed class’s damages will exceed $5 million.